Peter Foster: The zero-sum corporate model

Zero-sum corporate model: Something rotten in business education

Stakeholder theory – which is based on the notion that a corporation is a Hobbesian war of all against all — tends to be popular with people who don’t like capitalism or economics, mainly because they don’t understand them. What never ceases to amaze is how many of such theorists have been entrusted with educating future business professionals, and are consulted by the very organizations they perpetually criticize.

A model of such warped perspective, and loopy “solutions,” is Firm Commitment: Why the Corporation is Failing us and How to Restore Trust In It, by Colin Mayer, a business professor at the Saïd Business School at Oxford University. Mr. Mayer was in Toronto this week delivering his message to a no doubt receptive audience down at Toronto’s Rotman School.

Mr. Mayer’s book is a compendium of the zero-sum, short-termist view of business activity. If Wal-Mart customers are well-served, it’s only because Wal-Mart workers are being ripped off.

Tediously but typically, he seeks to undermine the whole study of economics by suggesting that the father of the discipline, Adam Smith (who spent six years at Oxford, and hated it), was a naïve believer in the rational straw man, homo economicus. In fact, Smith was all too aware of the delusions of human nature.

Mr. Mayer’s interpretation of the “Invisible Hand” is almost comically revealing: “Just as rats rushing to leave a sinking ship re-establish its buoyancy,” he writes, “so in the individual pursuit of our own self interest we collectively confer benefits on those who lie on the other side of the market.”

Mr. Mayer’s view of competition is all dog-eat-dog. In fact, while competition is essential to innovation and efficiency, the essence of the invisible hand is, as Smith made clear, the vast — but unrecognized — amount of cooperation produced by markets. Smith noted that the effortless coordination of thousands of people was required to produce the clothing, tools and home of the ordinary worker. We reflect on this no more today although our convenience reflects the coordination of millions.

The success of the modern corporation explains why it has become the focus of anti-capitalist agitation. Mr. Mayer suggests that it is the most important organization on earth. More important than government? Please.

Mr. Mayer makes the typical mistake of conflating coercive, political power with economic, that is, purchasing power. He claims that the corporation is “becoming a creature that threatens to consume us in its own avaricious ambitions.” It is a “rent-extraction vehicle” for short-term investors. “At the same time as it has been feeding, housing, educating an transporting us, it is also exploiting, polluting, poisoning and impoverishing us. The environmental disasters from Love Canal to Bhopal to the Gulf of Mexico to Fukushima do not need to be retold.”

Well, actually, they do. Love Canal was grossly overblown and the rest were accidents. Accidents are inevitable in an industrial society. The point is how astonishingly rare they are when set against the overall benefits of the capitalist system. Instead, Mr. Mayer sees only feckless greed and exploitation. “Anything that might inflict significant suffering on other parties but does not impact on a corporation’s own profits is dismissed as an irrelevance.”

Mr. Mayer refers to those who mount takeovers as “predators.” Could he explain how offering somebody an above-market price for something they own, which they can accept or not, bears any resemblance to being torn apart and eaten by a wild animal?

Mr. Mayer’s “answer” to problems that are largely of his own making is for draconian reforms that hedge in corporations both from above, via overseeing “trusts,” and below, via restrictions on selling shares. Trustees would be the “priests and rabbis” of the corporation (Presumably they would contain a fair sprinkling of business school profs. I’m sure Mr. Mayer would be available). But Mr. Mayer never explains how differences between the trustees and the board be resolved? Would fictional zero-sum stakeholderism be replaced by very real holy war?

Even less workable, he calls for system of flexible corporate taxation to reflect the degree of public vs. private interest in a corporation’s activities. Rates would presumably be worked out by bureaucrats with felicific calculators. The mind boggles.

The book is also fascinating for the ideas it skims over and the facts it ignores. It seems like just yesterday that every wonky business school prof was promoting corporate social responsibility. Now, according to Mr. Mayer, it’s all a crock that was always doomed to fail. In fact, his “trusts” would amount to CSR with teeth. The result would be chaos unless, of course, shareholders actually decide they want “priests and rabbis” hovering above their desire for investment returns.

Mr. Mayer makes no mention of the stunning coercive power of NGOs, which has been witnessed in the Keystone XL battle and in their shakedowns of forestry companies and their customers. Is that because those are the kind of “values” that his trusts would represent? As depressing as Mr. Mayer’s book is the praise he has received from fellow “educators.” In a blurb supporting the book, Rotman’s dean, Roger Martin, says “I heartily endorse his prescriptions … which are at the same time practical and break-through. Anyone interested in the future of democratic capitalism should read this book.”

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